A Radical Idea To Reduce Student Loan Debt

Social Security to solve the student loan crisis? How's that going to work?

The average college graduate has tens of thousands of dollars in student loan debt. Many are trapped in a downward spiral of debt with no apparent way out. But could a solution lie in a trade-off between loan forgiveness and delayed retirement? One congressman believes so — and is willing to bet Social Security funds that he can fix two problems with one solution!

American college graduates now collectively owe over $1.4 trillion in loan debt, and that number is rising as tuition continues to skyrocket.

The cost of college for many people may no longer be a viable option; though there is an alternative in apprenticeships and trade school. That’s great to know going forward, but what about those who are finished with school and are saddled with tens of thousands of dollars in loan debt?

When the payments on those loans are upwards of $300, $400, or $500 a month, that takes a serious chunk out of what could be used to get ahead in life (pay off a car, save for a house, etc).

But what about a bigger solution, on a much larger scale? Individuals can do things like the debt snowball, but maybe it’s time for Congress to step in and consider how to best address the crisis.

Normally, I’m very hesitant to support government programs for much of anything, especially involving education (after all, it’s government-backed loans that have driven tuition levels higher and higher). However, one lawmaker has an ingenious idea to reduce student loan debt, one that just might work.

Rep. Tom Garrett of Virginia has introduced legislation called the Student Security Act. If passed, this legislation would enable students to have a certain level of their loan debt forgiven in exchange for pushing back the time when they can collect Social Security.

For every $550 in student loan forgiveness – or roughly the average cost for one credit hour at a public university – a Student Security participant would agree to raise his or her full-retirement age for Social Security benefits by one month. A student could get a maximum of $40,150 in debt relief. To get that, the person would delay the starting age for collecting Social Security benefits by 6 years and 1 month.

In exchange for the loan forgiveness, retirement would be delayed in proportion to the amount of debt forgiven. The Social Security Administration estimates that delaying payouts would save about $700 billion over 75 years. That’s about 11 percent of what is necessary to make the program solvent.

During his introduction of the bill on the House floor, Garrett emphasized that it would not affect current Social Security Beneficiaries. It will only affect those who choose to participate in this program.

Running the numbers, could this work? A student can forgive up to $6,600 per year, to a total of $40,000 in debt. Forgiving the maximum, the student's Social Security payout will be delayed by six years and one month. Since the average Social Security beneficiary receives about $16,000 per year, that's a total of $97,333 that this person will not be receiving over that time period.

If we calculate inflation (at 2% annually) into the equation, the $40,000 amount forgiven in 2017 will be worth approximately $88,500 at retirement age. That's nearly $9,000 less than what that person would have been receiving with Social Security benefits.

To put it in other words, it's the difference between taking $6,600 now and $16,000 in 40 years. But even with inflation, the two numbers end up being about $14,500 now, or $16,000 later (in real dollars). That's a savings for Social Security and it helps get rid of the student loan bubble!

Given the rate at which the federal government is burning money, saving money in any way is desperately needed, both in Social Security and student lending.

Garrett’s proposal is bold, new, and outside the box. For this kind of massive problem, it's something to consider.

What do you think of this idea? Do you support the Student Security Act? Share your thoughts with me!

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